Stinky Breadth: FAANG Masks Market Weakness Beneath the Surface

Andrew Rocco Published on April 27, 2023

AMZN AAPL MSFT NFLX NVDA NTGR TSLA QQQ PI GOOGL MBLY QQQE

FAANG’s Dominance

FAANG is an acronym that stands for Facebook (now Meta Platforms (META)), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Google (now Alphabet (GOOGL)). The “FAANG” stocks rose to prominence over the past decade due to their strong price and fundamental performance and massive market caps. Since their initial rise, investors have often added to the group of stocks and have included the likes of stocks such as Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA).

Pictured: META and the FAANG names are outperforming the general market by a longshot.

Though the market has thousands of stocks to choose from, these stocks have earned the hype and popularity and continue to be the overwhelming choice of retail and tech-oriented institutional investors. Despite their already massive size, these stocks continue to gain market share through innovation, high growth, and market dominance. To give you an idea of FAANG’s dominance, Microsoft, Apple, and Amazon now comprise around 30% of the market cap weighting of the Nasdaq 100 ETF (QQQ).

Mega-Cap Tech’s Outsized Performance

Because three in four stocks tend to follow the general market’s direction, in the 2022 bear market, most stocks fell – including FAANG. However, in 2023, FAANG stocks are once again outperforming – and the performance is becoming more profound. For example, Microsoft leaped 7% on earnings earlier this week. Meta Platforms is up more than 10% this morning following its report. Conversely, smaller growth-tech names such as Mobileye (MBLY), Impinj (PI), and Netgear (NTGR) are getting clobbered by 10% or more after their reports.

Stinky Breadth

The dichotomy between mega-cap tech stocks and traditional growth names is the largest in recent times. Does it matter, though? The short answer is yes, eventually, it will matter. Weak participation (also known as breadth), can be sustained in the short-term. However, eventually the stocks that are holding the market indices up will succumb to gravity and pullback. In other words, you shouldn’t trust an index’s move just because it is marching higher – a few large weighted stocks, such as Microsoft, can skew the results and mask weakness beneath the surface.

An Easy Way to Gauge Participation

There are many ways to gauge market breadth, including the advance/decline line, new highs & new lows, and the up/down volume. However, one of the easiest methods I have found is to simply compare an equal-weighted index to a market cap-weighted index. Below is a year-to-date performance chart of QQQ – the most popular tech ETF.

While QQQ is up 17% in 2023, the Nasdaq 100 Equal Weight Index (QQQE) is only up a feeble 8%.

In other words, currently, the market is being held up by just a few strong mega-cap stocks.

Takeaway

A signficant dichotomy exists in the market between QQQ and QQQE. Investors should not simply take an index’s performance at face value but rather take the time to compare it to an equal-weighted index. Breadth is an important concept to understand as a rally is only sustainable for a long period of time with strong participation. Remember, a few large-cap stocks can mask the performance beneath the surface.

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